Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

Investors waiting for signs that Hewlett-Packard (NYSE:HPQ) has turned the corner may not have to wait longer. On Thursday afternoon, the company reported Q4 results that beat analyst estimates both on the top and bottom lines; guidance beat estimates, too. The company saw some improvement in its printing business and enterprise software, while weakness continued in its PC business.

HP's turnaround is confirmed by its technical chart, as the stock trades above its 50-day and 100-day moving averages. What does it mean for investors? Is it time to buy?


(Click to enlarge)

It depends on the investment horizon of individual investors. Short-term oriented investors may want to take profits at this point, as the stock had a big run-up from its lows at the end of the year. Long-term investors may want to begin accumulating the stock, betting on Meg Whitman's turnaround plan.

Company

Forward PE

Operating Margins (TTM)

Qtrly Revenue Growth (yoy)

Qtrly Earnings Growth (yoy)

Hewlett-Packard

4.90

7.95%

-6.7%

--

Dell

8.13

5.29

-10.70

-30.60

IBM

10.74

20.59

-.60

6.20

Hewlett-Packard's stock has been hurt by a number of strategic mistakes that wasted the company's resources and talent. In 2001, Hewlett-Packard made the first strategic mistake, the purchase of Compaq Computer that supposed to provide the company with the scale advantage in the PC market to compete effectively against Dell Computer (NASDAQ:DELL), International Business Machine (NYSE:IBM) and all sorts of emerging Asian competitors. The problem, however, is that the PC market was already saturated and ravaged by price wars, as the PC was turning into a "commodity." Besides, Compaq Computer itself didn't have an internal innovation system, but it relied on external acquisitions to expand its product portfolio (buying up Tandem Computer, and Digital Equipment Corporation).

In April 2010, Hewlett-Packard made the second strategic mistake, the purchase of near-bankrupt Palm that was supposed to help the company enter the fast growing market for mobile devices that began to replace PCs. The problem, however, was that Hewlett-Packard was a follower rather than a leader in this market, going against Apple that enjoyed the first-mover advantage in this market.

Last year, Hewlett-Packard made the third mistake, announcing the acquisition of enterprise software maker Autonomy (at a hefty price of $10.3 billion), as this move will pit the company against three major competitors, Salesforce.com (NYSE:CRM), Oracle (NYSE:ORCL), and IBM. Do today's results confirm that Meg Whitman is on the right track?

It is too early to say. So far she has been focusing on managerial adjustment like cost cutting through layoffs, which hasn't helped the stock recover so far. However, there are three strategic initiatives underway worth noticing. First, the paying down of the company's debt. Second, the shift from an external to an internal innovation model by cutting sales and marketing expenses and plowing back to R&D - a major departure from the policies of its predecessors. Third, the opening up of the company's operating system WebOS to the applications development community.

I do believe these initiatives are raising the chances for a company turnaround, especially the shifting to the internal innovation model and the invitation of application developers to the WebOS - both policies have worked for other technology companies like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT).

Opening WebOS to developers provide HP the chance to challenge the dominance of Google's Android system, especially if Android becomes a close system after the integration of Motorola Mobility with Google (NASDAQ:GOOG).

HP is an appealing bet for long-term investors, who can still collect a hefty dividend (3.09%) while waiting; and the prospect of a break-up that may unleash shareholder value.

Source: Is Hewlett-Packard Turning The Corner?